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Fortnightly Magazine - October 1 1998

In New York, for instance, the Public Service Commission has completed two of the three legs of the restructuring stool - retail access and divestiture of generation - on a utility-by-utility basis. The third leg, securitization of stranded costs, is very far along toward adoption at the administrative level as well. In other states, regulators are showing a good deal of interest. Regulatory assets, nuclear assets, and sometimes payments related to IPP contracts, are promising asset areas for this new technique. Given the power the commissions have come to exercise, it would be astounding if they didn't have the authority to do something that saves meaningful costs without affecting the utility's creditworthiness, and indeed occasionally enhancing it.

In the states that so far have passed enabling legislation, securitization authority generally takes the form of add-on clauses to basic language dealing with retail access and market power issues. Thus, these provisions have been little understood by the legislators involved. An article in the New York Times quoted various legislators in Connecticut as disclaiming any understanding of that part of the bill they were about to endorse. One legislator handed a telephone to his assigned lobbyist when a constituent called with questions.

An important point to consider is whether newly legislated securitization, which is readily tagged as a "utility bailout," is worth the bargaining chips a utility may need to use to obtain it. This tradeoff may not look like a good deal when utilities realize the same result can be accomplished under the existing regulatory scheme, including creation of a tariff-based financing, which could be rated 'AAA.'

In many ways, use of the existing statutory framework is simpler and easier than writing new law. The exposure of the utility to erosion of its position through the legislative sausage-maker may be meaningfully reduced. There may also be other reasons, based on a utility's corporate strategy and wish list, that could also make non-legislative securitization preferable.

Many observers and industry veterans agree that the three key elements necessary for securitization of utility rates - irrevocability, true sale and bankruptcy remoteness - exist in current regulation at least as strongly as they do not under the legislative model. With administrative securitization, moreover, the "property" concepts are not new ones and the legal path is in some ways easier.

One healthy development in the industry in recent years is the recognition that "best practices" doesn't just mean "the way we do it here." Rather, it means that there is more than one way to accomplish a desired result. For securitization that is certainly true.

New York Attorney J. Michael Parish is a frequent contributor to Public Utilities Fortnightly. The views expressed here are the author's and should not be read as, or taken to represent, views of his fellow law partners or of his law firm of Thelen Reid & Priest LLP.


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